What payment plans can retailers offer to non-prime customers?

Point-of-sale financing has become a popular way for people to pay for larger purchases. Nearly half of all U.S. consumers have financed a purchase in the last twelve months.

Retailers typically offer store credit cards and buy now, pay later options, but 47% of U.S. consumers don’t have high enough credit scores for them. And of those customers with lower or no credit, 3 out of 5 will not make the larger purchase if another financing option is not available to them¹.

On top of that, Reuters reports that 30% of banks tightened their credit standards in Q2-2023, making it even more difficult for consumers to finance a purchase.

Continue reading to learn about who non-prime customers are, and what payment plans you can offer them. Implementing these options will help you increase conversion rates and create an inclusive financing experience for all your customers.

Who are non-prime consumers?

Non-prime consumers have credit scores under 660 or have no credit at all. They represent 47% of the U.S. adult population, according to CFPB data.

Non-prime customers are rebuilding or establishing credit.

Major life events can result in customers having to rebuild their credit, including:

• Job loss or temporary unemployment

• Student loans

• Medical bills

• Divorce, which can lead to debt and issues with joint accounts, such as overdue payments and high credit utilization

Consumers establishing a credit history include recent college graduates, new members of the workforce, and immigrants.

Experian reports that 40% of people who went through a divorce reported that their credit score dropped by 50 points or more.

What payment plans can retailers offer to non-prime customers?

Since non-prime consumers typically face rejection when they apply for prime financing options, retailers need to provide them with other ways to pay over time.

There are (2) alternative, non-prime financing options, that retailers can offer to their non-prime customers:

• Second-look financing

• Lease-to-own financing

Second-look financing

Second-look financing is a type of installment loan for customers with near-prime credit.

These loans are typically offered to customers who don’t quite have the credit for a prime loan—thus the term “second-look”. Second-look loans typically have higher interest rates compared to prime financing options, but cost less than a lease if it is paid off over the full term.

Overview:

• Credit Score Needed: 600 - 659

• Max Term Length: 36 months

• Typical APR: 34.99%

• Market Size: 23 million U.S. consumers (9% of the U.S. adult population)

Retailers should consider offering second-look financing if they want to provide near-prime customers with the “next best” financing option, with compelling terms similar to what prime providers offer.

Lease-to-own financing

Leases are the entry point into point-of-sale financing for as many as 98 million consumers who have credit scores below 600 or no credit at all.

A lease is different from a loan:

• Instead of loaning money to the customer, the financing provider buys the item from the retailer and leases it to the customer.

• The customer gets to use the item during the leasing period and assumes ownership after their last payment.

• Customers can end their lease at any time by returning the item.

With a lease, customers can make fixed payment amounts over 12, 18, or 24, months and have the flexibility of paying off their lease early to lower financing costs.

Koalafi customers who pay off their lease within 90 days only owe an initial payment, the price of the item, and at times, an early purchase fee.

80% of Koalafi customers who pay off their lease do so before the full term, and 40% pay off their lease within 90 days.²

Lease-to-own financing has evolved over the last few years, particularly due to improved underwriting technology and a seismic shift to digital. This has led to a much simpler and more transparent application and payment process for customers.

According to ChargeAfter, retail adoption of lease-to-own financing is expected to increase 1.7x this year.

Overview:

• Credit Score Needed: None

• Max Term Length: 24 months

• Max Financing Costs: 2.0x - 3.0x of retail price

• Market Size: 98 million U.S. consumers (38% of the U.S. adult population)

Retailers should consider offering lease-to-own financing if they want to provide a payment option to a majority of non-prime consumers.

Let's compare the (3) types of financing retailers can provide

Ready to learn more? Read Non-Prime Financing 101, Koalafi's complete guide to non-prime retail payment options.

¹Koalafi customer survey, Fall 2022

²Koalafi internal data, July 2023